Microchip Beat Its September Targets, but a Flat December Guide Sank the Shares

Microchip Technology beat the high end of its September-quarter guidance on Thursday, but a flat December outlook sent the shares lower again on Friday.

Microchip Technology reported net sales of $1.62 billion for its fiscal second quarter, the three months ended September 30, 2026. Sales rose 42.2% from a year earlier and 9.2% from the June quarter, above the high end of the company's guidance.

The August 6 guidance midpoint was $1.6 billion. On a non-GAAP basis, Microchip earned $0.97 per diluted share, above its $0.91 to $0.95 guidance range and the $0.94 Zacks Consensus Estimate.

Profit cleared both the company's bar and the Street's

GAAP net income attributable to common stockholders was $373.6 million, or $0.68 per diluted share. Company guidance had been $0.53 to $0.54, and the year-ago quarter produced $13.9 million, or $0.03.

Non-GAAP net income was $559.2 million, up from $199.1 million, or $0.35 per diluted share, a year earlier. Revenue of $1.62 billion also topped the Zacks Consensus Estimate of $1.61 billion.

GAAP gross margin was 65.9%, and non-GAAP gross margin was 66.5%. GAAP operating income was $464.5 million, or 28.6% of sales, while non-GAAP operating income was $639.9 million, or 39.5%.

About $53 million of the quarter will not repeat

Chief Financial Officer Eric Bjornholt said about $53 million of September-quarter revenue came from infrequent items that will not repeat in December. The items were about $21 million from a pricing change on distribution inventory, $22 million of patent licensing, and $10 million from a long-term customer contract.

All three items carried 100% gross margin, which also flatters the September margin comparison. Adjusted EBITDA, a non-GAAP measure, was $705.4 million, or 43.5% of net sales.

Growth was broad, led by industrial and data center

Sales from industrial customers grew 50.3% from a year earlier, and data center sales grew 55.7%. Aerospace and defense rose 41%, automotive rose 19.3%, and communication rose 43.5%, while compute declined 1.6%.

Industrial was 34.6% of net sales excluding licensing revenue, and data center was 16.7%. Data center sales topped $250 million in the quarter, and the business is on pace to reach $1 billion in calendar 2026.

President and Chief Executive Officer Steve Sanghi said bookings stayed robust, with book-to-bill well above one. Design wins for the company's PCIe Gen 6 switch and retimer products reached 24, up from 19 at the end of September and 12 in June.

On the earnings call, Sanghi told analysts he has been saying "that data center is in the bubble," and argued Microchip's exposure is limited. Data center is 16.7% of sales, he noted, and half of that is broad-based products rather than dedicated data center systems.

December guidance is flat, and management calls that strong

For the December quarter, Microchip guided net sales to $1.57 billion to $1.64 billion. The midpoint, about $1.61 billion, is down 1% sequentially and up about 35.4% from a year earlier.

Normal December seasonality is a sequential decline of 3% to 5%. Excluding the one-off items, management framed the midpoint as 5% to 7% better than normal seasonality.

Non-GAAP diluted earnings guidance is $0.87 to $0.95 per share, with GAAP guidance of $0.47 to $0.50. The company guided non-GAAP gross margin to 64% to 65%, and GAAP gross margin to 62.9% to 63.9%.

The guide includes about $10 million from two small acquisitions: about $4 million from Hailo and about $6 million from Vorago. Microchip closed its Hailo acquisition on September 17 and closed Vorago on October 8.

Capital spending is guided to about $35 million in the December quarter and about $100 million for fiscal 2027. The board declared a December-quarter dividend of 45.5 cents per share, payable December 8 to holders of record November 23.

Microchip returned about $247.6 million to common stockholders through dividends in the September quarter.

Supply, not demand, is the constraint

Lead times for most standard products historically ran four to eight weeks. Sanghi said new lead times now run anywhere from six weeks to 32 weeks, as foundry and assembly capacity tightens.

The company said it holds substantial unsupported backlog on high-margin products its supply chain cannot fulfill this quarter. It is expanding capacity and securing additional wafer allocation, and some December orders are now scheduled into the March quarter.

Sanghi said the March-quarter backlog already looks better than December's did at the same point. He gave no March-quarter guidance, and said some of the constrained December orders are now scheduled into that quarter.

Shares fell again while chip peers rebounded

Microchip shares closed Friday at $58.34, down $6.51, or 10.0%, from Thursday's close of $64.85. Thursday's session had already taken the stock down 13.92% before the results were released after the close.

The drop diverged from a broad chip rebound on Friday, when Nvidia jumped 6.5% and the Philadelphia Semiconductor Index rose more than 6% intraday. Several analysts cut price targets on Friday, including Truist to $62 from $90 and Wells Fargo to $70 from $80.

What remains unknown

Whether added capacity arrives in time to convert the unsupported backlog into March-quarter sales is unresolved. The December print will also show how much of September's margin strength was the one-off items rather than the underlying business.

What to watch: lead times and capacity allocation into the March quarter, the December-quarter results in early February, and whether data center demand holds at the pace management described. Microchip's next test is turning strong bookings into shipments it can actually make.